SureWest Sells for Premium Price of $341 Million

Independent telecom provider ConsolidatedHoldings made a big push into video last week,after agreeing to buy SureWest Communications forabout $341 million, a move that will triple its videocustomers.

Consolidated has about 33,000 Internet-protocol videocustomers in Illinois, Pennsylvania and Texas. The additionof SureWest brings about 65,000 additional video customers(and 130,000 total subscribers) in Kansas City andSacramento, Calif., into Consolidated’s fold.

The purchase price was a hefty premium for SureWest— the $23 per share offer was 47% above SureWest closingprice of $15.59 on Feb. 3 — perhaps paid in part to ward offcompeting bidders.

Some analysts had speculated that Google wouldsnap up SureWest. The online search giant has beenbuilding an experimental fiber-optic 1 Gigabit-persecondhigh-speed data network in Kansas City, Kan.,and Kansas City, Mo. — SureWest’s backyard — forabout two years. But Google has had trouble grabbingrights to use existing utility poles in the cities, adevelopment that would have made SureWest an attractivetarget.

Drexel Hamilton analyst Barry Sine had earlier speculatedthat Google was eyeing a deal. “We see two potentialpositives for SureWest,” Sine wrote in January.“It could either be acquired by Google, as Google didwith Motorola Mobility, or it could become a tenant onGoogle’s network using it as an inexpensive way to significantly expand its footprint.”

On a conference call to discuss the deal, ConsolidatedCEO Bob Currey noted that Google has been in the Sacramentomarket for about two years and has yet to offerany semblance of service.

“Google has done nothing,” Currey said on the call.“There is no overlap with SureWest’s operating territory.We think there is some opportunity there for us to providesome service to Google if and when they decide tomove on that territory.”

Stock in SureWest rose 45.4% ($7.08 per share) to$22.67 last Monday after the deal was announced.

Consolidated shares were down slightly (1.4% or 27cents each) to $18.98 each on Feb. 6.

The deal seems to be another in what has been a seriesof smart moves for SureWest over the years. The ILEC expandedinto the Sacramento market in 2003, snapping upa state-of-the-art fiber-optic network in the city that hadbeen built by bankrupt overbuilder WINFirst for a bargain-basement price of $12 million. WINFirst had reportedlyspent more than $200 million to build out Sacramentobefore it ran out of cash.

For Consolidated, the deal gives them a strong presencein new markets — Kansas City and California — significantly bolsters its triple-play capacity and furthers itsstated plan to move toward less regulated higher gro wthservices.

For the nine months ended Sept. 30, Consolidated’stotal revenue was down 3% to $280.6 million and adjustedcash flow rose 1% to $141.2 million. At SureWest,total revenue rose 1% to $184.5 million for the firstnine months of the year, while net income fell 77% to$319,000. But perhaps most telling was where the bulkof that revenue came from. SureWest generated $139.4million in broadband revenue (up 8% for the period)and $45.2 million from telecom services (down 14% forthe period.)

The combined companies will have operations in sixstates and about 1,775 employees.

The merger is subject to standard closing conditionsincluding federal and state regulatory approvalsand the approval by both Consolidated and SureWestshareholders.

Morgan Stanley Senior Funding Inc. has providedConsolidated with $350 million of committed debt financing in conjunction with the acquisition. These fundswill be used to refinance the debt of SureWest and pay forthe cash portion of the purchase price.